I am the author of Silicon Dragon (2008) and Startup Asia (2012). My news and events group, Silicon Dragon Ventures (www.silicondragonventures.com), publishes e-newsletters, hosts a talk show, and develops forums in the world’s tech hotspots. I am the former international news editor of Red Herring, the Pulitzer-owned International Business, AdAge and Incisive Media. I have contributed to CEO, Inc., Worth, Fast Company, The Deal and Harvard Business Review, and am the founding editor of Digital Magazine News. My editorial consulting includes thought leadership reports for KPMG and Sony. In 2010, I provided expert testimony on China’s Internet for a Congressional commission in Washington, DC. I have appeared as a commentator on Fox Business News, Sky TV and CCTV. I have lectured at Yale, Columbia, NUS and Tsinghua, among others and spoken at the Asia Society, NASSCOM, World Affairs Council, Chamber of Commerce and Harvard Club.

Startup Asia Investor GSR Ventures Leads Gamble On Big Tech China

GSR Ventures’ new China fund of $133 million is a well-timed and strategic move, with an aim of investing additional capital in existing portfolio companies at a later stage of their development. It’s also a sign that all is not well in the Chinese startup and venture market.

The newly closed GSR Opportunities IV fund from one of China’s leading early stage investors is positioned for existing limited partners to potentially benefit from an upside in select, top-performing, market-leading Chinese companies in the GSR stable as those emerging businesses mature. GSR Ventures co-founder and managing director Richard Lim reasons that eight-to-ten billion-dollar technology companies are created in China annually, and expects that a number of them in the next few years will be in the GSR portfolio.

Read between the lines and it’s clear that the new fund also strikes at what has become an issue for GSR as well as most Chinese venture firms. Portfolio companies at most, if not all Chinese venture firms are stuck in a holding pattern — and limited partner investors in those funds are hungry for investment returns from “exits” through IPOs or M&A deals of “investee” companies.

Few emerging Chinese companies have been able to get publicly listed over the past year — after the peak period of 2010 and the first half of 2011. Few too, have been able to raise additional finance at valuations that come close to matching their startup’s prior venture funding, and they are reluctant to do what’s called a “down round” of finance that values their business far lower than the prior capital injection. Mergers and acquisitions are on the rise but still limited. Loans or venture debt is not common for these small and medium-sized entreprises in China. Startups need cash to continue on a fast-growth cycle that is necessary to stay ahead in China, let alone go toward an IPO.

Not that it has been a drought for GSR companies. Mobile security service NQ Mobile on the NYSE in May 2011 — although its share price has fallen below the IPO price, the same as with most recently listed Chinese companies. A clear winner was another portfolio company, travel search engine Qunar, which drew a majority strategic investment from Baidu for $306 million in June 2011.

The new fund is intended for investees such as group buying site Lashou, which was aiming for an IPO in the U.S. late in 2011 after raising $110 million in April 2011 in a Series C financing led by Milestone Capital and including Series A investor GSR, plus prior backers Norwest Venture Partners and Tenaya Capital. With social commerce sites becoming overcrowded in China, Lashou has broadened its mix to include a location-based mobile SNS service.

GSR Ventures’ new fund comes on top of a fourth fund of $350 million raised in mid-2011 — a fast pace of fund raising for GSR (short for Golden Sand River, or the upstream of the Yangtze), which was formed in 2005 as an offshoot of the Mayfield fund at a time when Kleiner Perkins and Sequoia Capital were also setting up in China. GSR has been at the forefront of venture firms making a bet on leading edge technologies from China’s emerging leaders and has invested in greentech, semiconductor, Internet and wireless companies, with several investments in the LED (light-emitting diode) space, for instance.

Since 2005, venture in China has already undergone two booms (think Baidu and Alibaba in the first wave, and Dangdang and Youku in the second wave) and now this downturn, which started in early 2011.

Having just returned from two weeks in China and meetings with several leading VCs in the market, including Silicon Dragon Beijing 212, I can say that the outlook among most is still optimsitic for the long term. Not only is the China growth story continuing, offering a once-in-a-lifetime opportunity to grab market share, but the technology advances and management talent at Chinese companies is also on the rise.

At the same time though, limited partners such as China fund-of-funds Jade Invest are pulling back from the asset class. Read more about this in next week’s post, reporting on the Beijing event.

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